Last year, my fiancee and I donated a few dollars to some charities whose work we very much believe in and this we’re hoping to do the same. Just recently though I’ve come across a more powerful way of donating money that isn’t necessarily new, though it is new to us. Donating stock to charity is especially powerful because it allows you the ability to avoid capital gains tax and still lets you deduct the full value of the stock from your income (if you itemize).

Let’s say you bought $100 worth of stock in Amazon.com (I own Amazon.com) over a year ago. In that year the share price has essentially doubled, making your position worth $200. Now that a year has passed, you’re subject to the 15% long term capital gains tax if you were to sell the position. Now, you plan on donating $200 to the National Hemophilia Foundation[3] this year now that you’ve read this article, you’re considering donating the $200 position in Amazon. What you get is an itemized charitable donation deduction of $200 and the Hemophilia Foundation gets their $200.

Is this better than donating stock? Yes, by a little bit (about 15%). By donating the stock, you avoid the 15% tax. If you were to sell the stock and donate the $200 anyway, you’d pay the 15% and then donate the $200, though some of it would come from other sources. By taking advantage of the stock appreciation, you can avoid the paperwork and tax of selling.

One mistake you may be tempted to make is in thinking that the donation only “costs” you $100 because that’s your initial investment. While that may make a little sense from a psychological perspective (as in you could convince yourself of that if you really really wanted to), it doesn’t from a financial sense. It doesn’t matter how much you paid for $100 because it’s worth $200 now, so you’re donating $200 you wouldn’t otherwise use for yourself. It’s as if someone swapped your $100 bill with a $200 bill (if one still existed).

The only rule you have to follow is that you need to have held the stock for at least one year (1 year + 1 day) in order for the it to be a “qualified appreciated stock.” If it’s held for less than one year, it’s considered a “ordinary income property” and your deduction is limited to the cost basis of the position, or the original $100 you invested in the above case.

Right now neither one of us holds anything except index funds (you can donate those too) in a brokerage account outside of our retirement accounts and those funds are all less than a year old so we won’t be taking advantage of it this year, but it’s certainly going to be an option in the future.